Patent licensing raises tech sector’s pulse

These days, investing in tech is a little bit more complicated than just buying Apple Inc. and Google Inc. and maybe picking up Resarch in Motion Ltd. before tossing it back in the discount bin.

One sector within the space that is picking up a real head of steam is patent licensing, launched to the forefront by Wi-LAN Inc.’s very lengthy and public hostile pursuit of Mosaid Technologies Inc.

“I think people are starting to realize now that these companies are proving the value of monetized patents,” Sameet Kanade, analyst with Northern Securities Inc., said Wednesday. “Once those patents are proven, they’re pure cash cows. Every dollar you add to the top line pretty much flows to the bottom line.”

Unlike Motorola, IBM Corp. and other large companies that hold a portfolio of patents alongside product sales, Wi-LAN and Mosaid are part of a small but growing segment of firms that are built entirely on patent ownership.
Both are publicly-listed companies based in Ottawa and focus their businesses on acquiring patents at auction on key technological components that make smartphones, tablets and laptops go. The companies then take those patents and negotiate licensing fees with companies using those technologies. If that fails, the companies will take them to court for infringement.

Florian Mueller, a technology patent expert based in Germany, said so-called “non-practising entities” have distinct advantages over traditional technology companies.

“Unlike an operating company, you don’t have to worry about your reputation. It’s more like the worse your reputation is due to aggressive enforcement the more money you’ll make, because they’ll all be afraid of you,” he said.

Generally, only between 3% and 5% of patents owned by patent licensing companies actually produce income, but because these businesses have very few outside costs the cash flows are very attractive.

“Mosaid has a treasure trove of proven patents that generate $85-million to $90-million in revenues a year,” Mr. Kanade said.

Mosaid also has six court cases in the works, and the top two each add about $25-million to that figure.

Wi-LAN certainly sees the value in taking out its competitor and forming a Canadian patent powerhouse, upping its all-cash per share offer for Mosaid to $42 a share on Wednesday. This values the company at more than $500-million. Yet Mosaid and its primary investor, Mawer Investment Management Ltd., have resisted Wi-LAN’s advances, insisting they have a “white knight” private investor willing to offer an even heftier price tag.

And with Mosaid shares pushing as high as $42.55 on the Toronto Stock Exchange on the news, the Street is starting to see the value in patent licensing as well.

“The ball is in Mosaid’s court. They have to come up with more concrete details on who the white knight is and what the offer is,” Mr. Kanade said.

Aside from Mosaid, another likely takeover target is U.S.-based RPX Corp., which is worth about double that of Mosaid, Mr. Kanade said.

RPX uses an alternative, no-litigation model by acquiring “problem patents” on the open market and then offering these licences to clients for an annual fee.

Another potential takeover target is InterDigital Inc., which put itself on the market earlier this year and owns a portfolio of more than 8,000 patents, Mr. Mueller said.

However, investors interested in the space must understand that as the patent industry gets more attention and more cutthroat, major technology companies such as Apple will become more aggressive in bidding for patents at auction to avoid getting bullied by patent licensers.

“Apple, for instance, is a very deep-pocketed buyer, and Apple has bought patents used against it in litigation. They were defending themselves, but after a while they turned around and said ‘Let’s just buy them,” Mr. Mueller said. “The buying side is the most competitive it’s ever been.”

He cites Mosaid’s recent deal with Microsoft for Nokia’s 2,000-patent portfolio as a smart alternative strategy. Instead of paying for the patents, Mosaid agreed to a profit-sharing arrangement on the fees.

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